The Good (and Bad) News I Shared

I’ve recently had the opportunity to share some good news with a very nice couple who was referred to us by one of our Relaxing Retirement members.

But, then I had the obligation to share some bad news as well.

Their story is so important that it led me to do some more research that I will be sharing with you in the coming weeks.

For today, however, I’d like to tell you about the good news and the bad news.

In order to protect their privacy, I’m going to refer to this couple as Gary and Barbara.

Gary and Barbara are both 64 years old and they now find themselves in the same place as many of our Relaxing Retirement members today.

They’re empty nesters and they’re emotionally ready to retire and get more involved in the “grandparenting” business because their middle daughter just gave them their third grandchild in less than two years!

How great is that!

Can We Afford It?

What Gary and Barbara want to know from me is if they can afford to retire.
And, if they can, how do they generate lifestyle sustaining income because they’ve never done this before.

This is a key commonality that I see so much. They’ve never done this before and they’re just not confident.

One of the big reasons why they lacked 100% confidence is their investment performance over the last few years, and all of this market volatility that we’ve been experiencing.

During their Retirement Confidence Preparation System™ meeting that we had, in addition to having an extensive conversation about their experiences and their priorities, I also had the opportunity to review their investment holdings because they brought several years worth of statements that they kept neatly in a large 3-ring binder as we requested.

While reviewing their statements during our meeting, I noticed that there was a lot of activity (buying and selling) at random times, so I asked what triggered all of that movement.

Gary’s answer is what sent me on the research assignment that I’m going to share with you.

His answer is one that I hear far too often: “I evaluate what’s doing well and what’s not and I reallocate.”

My response was, “reallocate to what?”

Gary’s answer: “out of what wasn’t performing well to what was performing better.”

The Good News

Now, as I’ve done in the past, I’d like to reserve my reaction to his comments for a few minutes, and report to you the good news I shared with them!

When we designed their Retirement Blueprint™ and ran their Retirement Resource Forecasters™, taking into account all of their priorities and all their resources, the good news that I had for them was they had enough money to make it all work!

Enough money and income to continue living the way they wanted without running out of money over their expected lifetime.

Now, as you can imagine, this was huge relief for them. And, something they did not realize before we met and designed their Retirement Blueprint™.

As you can imagine, they were on a real high at this point. However, that soon simmered as I alerted them that I had to temper it with some precautionary bad news.

The Bad News I Had to Share

After carefully evaluating their last three years worth of investment statements, the bad news I had to report to them was if they continued doing what they had been doing, there was a high likelihood that they’d run out of money within 7 to 9 years!

I know…ouch!

Now, why did I have to tell Gary and Barbara this when I just told them that they had enough money to support their lifestyle for the duration of their life expectancy?

The reason I had to tell them this was their Retirement Resource Forecasters™ had some assumptions built into them.

First, we have to account for the fact that they’ll need more and more income each year just to remain in the same position due to inflation.

And, second, we have to assume that they can earn the investment rate of return that they need to earn in order to keep pace with inflation, which, for them, is not a very high return.

However, given Gary and Barbara’s “system” of investing, they had little or no chance of accomplishing that.

What they actually employed was not a system, but random selection and timing.

Their allocation actually wasn’t that bad three years ago. It was actually fairly well diversified.

However, they continuously killed that diversification by trying to shift out of what just performed poorly over to what had performed better.

Gary and Barbara’s “System”

Unfortunately, Gary and Barbara’s investment “system”, or better stated: “behavior” is not unusual.

Statistics tell us that it’s the norm.

As you’ve heard me report before, there’s a financial research firm located here in Boston by the name of DALBAR. And, every year, DALBAR performs a quantitative analysis of investor behavior.

Upon investigation, I discovered that their 2011 study for the 20 year period covering 1991 – 2010 has been published, so I purchased it.

Here’s what the report reveals:

The Average annual return of the S&P 500 Stock Market Index from 1991 – 2010 was 9.14% (including dividends reinvested)

However, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) over the same 20 year period was 3.83%

Take a moment to stop and re-read those two numbers for a moment and let them sink in.

What these numbers tell us is that, while the S&P 500 Market Index delivered a strong average annual return over those 20 years of 9.14%, the average stock mutual fund investor (a person, not an investment) only achieved 3.83%!

That means that the average equity investor’s return was 58.1% less than the broad market index each and every year!

Bond Investors fared even worse. Here are the DALBAR statistics for them:

The Average annual return of the Barclays Aggregate Bond Index from 1991 – 2010 was 6.89%

However, the average annual return of the “average” bond mutual fund investor (not investment, but an investor, i.e. a person) over the same 20 year period was 1.01%(a difference of 85.3% per year).

How incredible is that!

It’s mind boggling, but it doesn’t surprise me after what I’ve witnessed over the last 22 years in this business.

Just think about Gary and Barbara’s story that I just shared with you!

We’re Fighting the Wrong Problem

What you can’t help but take away from those statistics is that, while it makes all the news, markets (or bad investments) are not our biggest problem.

The BIG problem is investor behavior, which is driven by their “strategy” or lack thereof.

Forget for a moment about trying to “beat the market” which is what everybody talks about.

The average stock mutual fund investor earned 58% less each and every year than the S&P 500 market index (a market barometer of “average” returns, not above average!).

Think about that for a moment. Something that we all can control is what our biggest problem is.

It’s uncomfortable, but it’s the only logical and rational conclusion we can reach given the results of this research report. What else could possibly explain the massive difference in real life returns that people receive?

The obvious question is why, and what can we do to close this performance gap?

Well, there are several easily correctable “strategic mistakes” that I’ve personally witnessed over the last 22 years that I’d like to share with you.

Stay tuned. I’m not sure there’s anything more important about investing during your retirement years than what I’m going to reveal to you in the coming weeks.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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